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Three-Year Comparison of Book/Tax Differences (M-1/M-3)

This template summarizes the numerous book-tax adjustments necessary for preparing a corporate income tax return. Schedules M-1 and M-3, Form 1120 (Reconciliation of Income [Loss] per Books With Income per Return), reconciles these differences. The Schedule M-1 must be prepared by corporations with total receipts or total assets of $250,000 or more. The Schedule M-3 must be prepared by corporations reporting gross assets of $10 million or more in assets on Schedule L of Form 1120.

However, corporations and partnerships with assets in excess of $10 million but less than $50 million will be allowed to file Schedule M-1 in place of parts II and III of Schedule M-3. Part I lines 1-12 of Schedule M-3 will still be required of these taxpayers.

Change is effective for tax years ending December 31, 2014 and later.

This template is designed to compare three years of book/tax differences.  Its purpose is to aid in the review of these differences on an annual basis and in the preparation of Schedules M-1 and M-3.

A worksheet is included for preparing the companion Form 8916-A for reporting the cost of goods sold on the Schedule M-3.

A mapping of items on the M-3 Schedule to the M-1 Schedule is provided for quick reference.

Entering Information

All of the information needed to produce the reconciliation schedule is entered on the Input worksheet.  The yellow highlighted cells are calculated fields, and no data should be entered in these cells.  Gray cells are not calculated fields, but data should not be entered in these cells.

Enter the current tax year.  (The prior two years will be entered automatically.)

Enter the following information for each tax year:

• Net income (loss) per books
• Federal income tax (The tax benefit or refund should be entered as a negative.)
• Capital losses in excess of capital gains (C corporations only)
• Income subject to tax not recorded on books:
• Excess of tax over book gain on sale of assets

• Excess of tax over book gain on sale of assets
• Prepaid rental income (recognized for tax but not book)
• Other prepaid revenue (recognized for tax but not book)
• Positive 481(a) adjustments (four-year spread on income recognition)
• Installment sale income
• Guaranteed payments (other than health insurance)
• Other income subject to tax not recorded on books

• Expenses recorded on books but not deducted on the return:

• Excess of book over tax depreciation

• Contribution carryover (contribution limited for tax in current year)

• Nondeductible travel and entertainment

• Section 263A costs capitalized into inventory

• Bad debts (reserve method)

• Fines and penalties

• Key person life insurance premiums

• Excess over book over tax loss on sale of assets

• Organization and business start-up costs expensed in year incurred for book purposes

• Accrued vacation pay and bonuses paid more than 2 ½ months after year-end

• Other expenses recorded on books not deducted on the return

• Income recorded on books but not included on the return:

• Tax-exempt interest income
• Excess of book over tax gain on sale of assets
• Key person life insurance proceeds
• Income reported on the installment method (recognized for book but deferred for tax)
• Prepaid rent (recognized for book but not tax)
• Other prepaid income
• Other income recorded on books but not included in the return

• Deductions on return not deducted for the books:

• Excess of tax over book depreciation
• Contribution carryover from prior year deducted in current year
• Bad debt expenses (specific charge-off)
• Excess of tax over book loss on sale of assets
• Depletion (excess of percentage over cost)
• Amortization of organization and start-up costs previously expensed for book purposes
• Section 263A costs relieved from inventory
• Accrued vacation pay and bonuses from prior year not deductible until current year
• Other deductions on return not deducted for books

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